Bulgaria: Gambling on Gas Routes

To hear some talk, Bulgaria has sold itself down the river; for others, the country has just pulled off a masterstroke. Either way, Sofia’s recent signing of a final agreement with Gazprom for the South Stream pipeline is certainly a significant step.

It paves the way for the giant pipeline to begin construction under the Black Sea next month, but with questions still remaining about its feasibility some are asking whether Bulgaria has been short-sighted in siding with the Russian rather than the European camp. Closer analysis suggests, however, that Sofia is now in a win-win situation.

The ‘European camp’ is not quite what it was, of course. The old ‘South Stream vs Nabucco’ battle to bring gas through the Southern Corridor to Europe is over, with the grand unified Nabucco replaced by the Trans-Anatolian Pipeline across Turkey and then either Nabucco West into central Europe or the Trans-Adriatic Pipeline (TAP) into Italy.

However the underlying dynamic – of direct competition between Russian and Azerbaijani gas supplies in southeastern and central Europe – still remains the same. Both European options would, like South Stream, provide gas to the Balkans, particularly Bulgaria and Serbia.

Although proponents of both the European-backed pipelines and Gazprom have talked up southeast Europe’s demand for natural gas, figures from BP’s statistical review of world energy indicates that in key countries like Bulgaria, gas demand is barely rising – in 2011 it was just 2.9bcm. Some small-scale domestic production (of conventional and unconventional gas) will reduce the demand for import even further.

Nonetheless Bulgaria has consented to host South Stream, in exchange for a substantial price cut in Russian natural gas. The new deal sees Gazprom agreeing a 20% reduction in pricing, more than the 11.1% the Bulgarians had already held out for. Gazprom will supply 2.9bcm for at least six years, which constitutes the whole of Bulgarian demand.

Although the deal can be modified in future to take account of increased domestic production, for now the agreement contains an 80% take-or-pay provision, down from an old threshold of 90%. Bulgaria currently relies on Gazprom for about 90% of its gas demand, so this has given Sofia a bit of flexibility, although it had been seeking to abolish the clause entirely.

Prime Minister Boyko Borisov said that South Stream would create jobs and would not cost Sofia a penny, another major sticking point in the negotiations. Earlier concerns that Bulgaria would spend the first fifteen years of transit fees paying back Gazprom for building costs have been laid to rest now that the Russians have agreed to finance construction. But transit fees and a few hundred temporary jobs are small recompense for continued dependence on Moscow.

Borisov has been outspoken in his belief that South Stream has better prospects than Nabucco. He said, rather confusingly, that although Nabucco remained Sofia’s top priority it was too expensive and “still we don’t know the source of gas for the pipeline”. This is both untrue (Shah Deniz gas will fill it) and ironic, given the continuing mystery over the source of South Stream’s 63bcm, but his ambivalence is clear.

In a leaked report in September, the European Commission complained that “Bulgaria also needs to play a more proactive part in opening up the Southern Gas Corridor, which has the potential to diversify supply sources”. The EU has also said that South Stream cannot be built across EU territory without a thorough environmental impact assessment, which seems impossible to achieve before construction in Bulgaria starts by mid-2013.

So Bulgaria, with limited demand growth, a promising offshore industry and decent if troubled shale prospects, and the offer of EU-backed supplies from Azerbaijan and Turkey, has instead picked to maintain its reliance on unreliable and politically awkward Russian gas through South Stream, antagonising Brussels in the process. Why?

Timing is one reason. Borisov may simply not trust the Southern Corridor to deliver soon enough, and be sceptical about the prospects for domestic shale and offshore development in the near term. This is about timing above all, and in the next few years Bulgaria has no option for gas supplies but Russia.

It may also reflect broader geopolitical priorities. If Nabucco West is chosen, which seems a fairly good bet, Bulgaria will be the first stepping stone on EU territory, and thus a vital link between central Europe and the Caspian. Regardless of how much gas it takes from Nabucco West – probably very little – Sofia will receive transit fees and the political cachet of being part of the Southern Corridor link.

Most importantly Nabucco West will act as an auxiliary gas supply system. If Russian gas supplies failed or the contract is annulled Sofia could plug the gap with local supplies and Nabucco West. The European link is not going to disappear and will not withhold supplies for political reasons, despite EU irritation about Bulgaria’s lack of commitment.

In the meantime, Bulgaria can receive heavily discounted Russian supplies, transit fees from Gazprom, and – crucially – the geopolitical weight of being essential to one of Vladimir Putin’s most valuable projects. Ukraine, another transit country beholden to Russian gas, has repeatedly suffered because it has no other options than to take whatever Moscow offers, but Bulgaria will have more freedom in the coming years.

This is essentially a gamble which Bulgaria cannot lose. If Nabucco West is built, Bulgaria becomes a central Southern Corridor player, earns transit fees, and gets a vital back-up supply in case of any problems with Russian gas. If TAP is built, then Bulgaria will still get limited access via Balkan interconnecting infrastructure.

And if for whatever reason neither of them got built, Bulgaria would still benefit from a healthy discount on Russian gas and its position as a vital part of Russia’s energy strategy in Europe. Not an ideal scenario, but Bulgaria’s relatively low gas demand and its own domestic prospects would also give it some flexibility on pricing and supply security. 

Of course, if something dramatic happened and South Stream didn’t get built either, Bulgaria would probably lose its gas cut: but this would just return it to the status quo ante. Bulgaria could live with that too. Like all good gamblers, Borisov knows that spreading your bets is often the best option.

Alex Jackson is an analyst of political, energy and security issues in the Caspian region. He is based in London and can be contacted at ajackson320@gmail.com.